San Francisco Business Journal: “Housing’s tale of two cities: Seattle builds, S.F. lags”

April 28, 2017

Housing’s tale of two cities: Seattle builds, S.F. lags

Apr 28, 2017, Blanca Torres

Seattle and San Francisco have a lot in common, from tech-dominated economies to highly educated populations to left-of-center politics. But they couldn’t be more different in one key aspect: housing production.

In recent years, both cities have added thousands of new jobs, turning up the volume on housing demand. The difference has been that in Seattle, planning for new housing has combined with availability of sites for development to fuel a robust housing boom. Developers have also stepped up housing production in San Francisco, but the number of new homes pales in comparison.

From 2010 to 2016, the City by the Bay added a paltry 15,730 units. Its northern neighbor added 32,000. Since 2000, Seattle has seen 70,000 new homes completed while San Francisco saw just over 38,000.

Seattle has 200,000 fewer people, with a population of almost 700,000 vs. San Francisco’s nearly 900,000.

So how can smaller Seattle make so much more housing happen than San Francisco? Developers active in both cities and officials who have worked in both point to structural differences that outweigh the demographic similarities.

Streamlined up north

In San Francisco, development issues are routinely subject to consideration by neighborhood bodies, approval by the city planning commission and often ratification by its board of supervisors, with opportunities for decisions to be appealed.

Seattle’s approval process is much more streamlined, said John Rahaim, San Francisco’s director of planning, who previously worked in the same capacity in Seattle. Projects go through a design review process overseen by neighborhood boards. Once those boards approve a project, it is free to apply for building permits. The city’s planning commission is strictly a policy entity. It does not approve or reject projects. The city council weighs in on projects only in rare cases.

For Paul Menzies, CEO of Walnut Creek-based Laconia Developments, the difference is dramatic. Laconia plans to start construction later this year on its second Seattle highrise, a 370-unit, 42-story tower. It got its entitlements in eight months.

“Seattle is quite phenomenal,” Menzies said. “It’s one of the most exciting markets in the country.”

It’s one that remains considerably more affordable than San Francisco as well. In Seattle, the median price of a home is about $620,000 and the median rent is $2,400, according to Zillow, a Seattle-based real estate information company. San Francisco’s medians: $1.198 million for a home and $4,350 for a rental. San Francisco residents spend about 54 percent of their income for the median mortgage payment and 56 percent for the median rental payment, according to Zillow. In Seattle, the comparable numbers are 28 and 33 percent respectively.

“For someone moving from San Francisco to Seattle, Seattle looks so much more affordable,” said Svenja Gudell, Zillow’s chief economist.

To be sure, the grass doesn’t always seem greener up north. Despite Seattle’s impressive growth, the city is wrestling with its own housing issues. As here, residents are increasingly being priced out of formerly affordable neighborhoods, traffic and congestion are much worse than years past, while concerns about too much density and loss of neighborhood “character” have reached a boiling point.

Seattle’s housing values shot up by 11 percent during the past year while San Francisco’s stayed flat.

“In Seattle, we have quite a bit of runway for prices to go up,” Gudell said. “Demand is strong enough for prices to keep going up.”

Seattle, however, remains a top destination for people looking to escape the Bay Area’s high housing costs because even as Seattle prices have soared, they are still, on average, about half of San Francisco’s.

Developers play in both cities

Several developers are active in both markets. Major apartment developers such as AvalonBay, Essex Property Trust and Equity Residential own and operate thousands of units in both markets.

Trumark Urban, which has built seven condo projects in the last five years in San Francisco, is now scouting sites in Seattle. The firm is not seeing as much opportunity in San Francisco as in the past, said Arden Hearing, head of Trumark Urban. In San Francisco, construction costs, land prices and development fees have jumped in recent years.

Menzies said Laconia has built several East Bay apartment projects, but it balked at developing projects in San Francisco — too much bureaucracy and competition.

The firm completed its first Seattle development in 2015. Cielo, a 31-story tower with 335 apartments, has “done very, very well,” Menzies said. The building offers studios, one- and two-bedroom units with rents starting around $1,600. Two-bedroom units with the most space and best views run up to $4,500 — roughly the starting cost of a one-bedroom in a newly built San Francisco apartment complex.

Menzies said the eight months it took to entitle its second Seattle project, at 600 Wall St., would be impossible in San Francisco.

Like many developers, he thinks that the California Environmental Quality Act, known as CEQA, makes it too easy for residents to sue projects, effectively holding them up for years or blocking them.

“There is just more of an understanding in Seattle that we have to accommodate growth,” Menzies said. “They understand that just because we don’t build it doesn’t mean they won’t come.”

Robust job growth and soaring populations are fueling demand for development in both cities. The stark difference is that while job growth outpaces housing production in both cities, Seattle has done a better job balancing the two.

San Francisco has seen roughly 125,000 new jobs since 2010, according to the UCLA Anderson School of Business, meaning that for every 12 jobs added in the city, only one new unit of housing was built. Meanwhile, Seattle added about 89,000 jobs from 2010 to 2015, according to the Puget Sound Regional Council, which works out to about one new housing unit for every three new jobs.

Seattle anticipates adding 70,000 new housing units and 115,000 jobs from 2015 to 2035. This year alone, the city expects to add 8,681 market-rate apartments and another 10,000 in 2018 and 11,500 in 2019, according to Seattle-based Dupre + Scott Apartment Advisors.

Missing middle confounds

Both cities fear they are losing middle-income residents.

“Seattle used to be a relatively affordable place to live and is becoming an expensive market,” Gudell, the Zillow economist said. “There is a lot of demand for housing from tech workers, but you still have a lot of normal folks working here making $50,000 and $60,000 per year.”

In San Francisco, during the past 20 years, the city’s share of middle-income people dropped from 49 percent to 38 percent, said Todd David, executive director of the San Francisco Housing Action Coalition.

The decline in middle-income people was completely replaced by an increase in upper-income people, David said.

When most cities add housing, the newest units are typically the most expensive and then go down in price as newer homes are built. That doesn’t happen in San Francisco, David said, because there is so much demand that even older units are pricey. San Francisco would have to add about 5,000 units per year for about 20 years to catch up with demand — an unprecedented level of growth.

“We are not building enough housing to accommodate for population growth,” David said. “There are multiple people competing for the existing housing inventory.”

Most of the new housing in both San Francisco and Seattle targets the high end. Scarcity of sites in both cities leads to high land prices in addition to other development costs, said Morgan Shook, a Seattle-based economist with ECONorthwest who specializes in land use and real estate policy.

“It’s not that you can’t build for middle income, but you have so much demand at the top of the market that you would be crazy not to build for that market,” he said.

But, in Seattle, the influx of high-end housing takes some pressure off the low-end.

“People say, ‘my rent went up 5 percent, that’s a lot,’” Shook said. “If we didn’t build all that housing, maybe that rent would have gone up 10 percent.”

Seattle’s secret sauce

Housing production has been strong in Seattle because of the trifecta of available sites for development, upzoning that encourages more density and robust job-fueled demand.

Areas north of downtown, including Denny Triangle and South Lake Union, where Amazon has built or leased multiple office buildings, and former low-rise neighborhoods like Ballard and West Seattle had lots of parking lots that are now high-rises, Shook said.

Developers could choose from “low-hanging fruit” for development sites, he said, but now most has been eaten.

“How well will Seattle be able to replicate (housing production) for the future?” Shook asked. “The big question going forward: Can you still find the old parking lot and old building that you can recapitalize into something more dense?”

Developers in San Francisco have similar questions.

Just building more units won’t solve San Francisco’s housing crisis on its own, Rahaim of the planning department said. The city needs to tackle issues such as workforce housing for middle-income earners, and long-term planning.

San Francisco is “building more housing now than we have in decades,” he said. “I’m really concerned about what’s happening on the regional level. San Francisco has ramped up production while surrounding counties have declined.”

“What we see is pretty intense energy,” said Arden Hearing, head of Trumark Urban, a development firm with three condo developments selling units. The beginning of 2017 has been busier for sales than the past year and a half, Hearing said. The market continues drawing in buyers with high incomes who are tired of renting and want to take advantage of historically low interest rates while they last.

“Everyone agrees the economy is back on track” after the uncertainty of the presidential election last fall, Hearing said.

In March, 885 condos in 15 projects were on the market compared with 398 during the same period the year before, according to Polaris Pacific, a condo marketing and research firm. For the past six months, the total number of condos on the market was double what it was the previous year.

Still, the market has remained tight with about three months of remaining inventory, which refers to the amount of time it would take for the entire supply of condos to sell out.

Six months of remaining inventory is considered a balanced market, meaning that as far as new condos go, San Francisco is still a seller’s market.

Hearing said many buyers are looking for a neighborhood experience, “where they can walk around, see all the mom-and-pop shops and artistic eateries and feel a sense of community.”

Many buyers tend to be professionals who want to live near transit and are tired of paying rent. Depending on how much a buyer puts down, a mortgage on a condo can be less than renting an apartment for $5,000 a month, Hearing said.

In Lumina, San Francisco’s largest condo development, only about 20 percent of the project’s 656 remain unsold.

The project, at the corner of Main and Folsom streets in the Rincon Hill neighborhood, offers condo homes in two towers with 45,000 square feet of amenity and common space. Amenities include a fitness center, 70-foot lap pool, private dining room with chef’s kitchen, landscaped rooftop terrace with barbecues, club lounge, games room, movie screening room, children’s play room, music practice room and a business center.

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April 6, 2017

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10 Must Reads for the CRE Industry Today (April 4, 2017)

April 4, 2017 By Elaine Misonzhnik

Dollar General will purchase 323 stores left over from the Dollar Tree/Family Dollar merger, reports Supermarket News. Chicago Tribune takes a close look at Amazon’s new bookstore. These are among today’s must reads from around the commercial real estate industry.

At Kushner’s Flagship Building, Mounting Debt and a Foundered Deal “The Fifth Avenue skyscraper was supposed to be the Kushner Companies’ flagship in the heart of Manhattan — a record-setting $1.8 billion souvenir proclaiming that the New Jersey developers Charles Kushner and his son Jared were playing in the big leagues. And while it has been a visible symbol of their status, it has also been a financial headache almost from the start.” (The New York Times)

Dollar General to Acquire 323 Stores “A batch of 323 small discount stores spun off in 2015’s Dollar Tree-Family Dollar merger are being sold to rival Dollar General, the seller told SN Monday. The stores, which are currently operating under the Family Dollar banner, were acquired less than two years ago by New York private equity firm Sycamore Partners, which had planned to convert the stores to the Dollar Express banner. Instead, the stores will be converted to the Dollar General banner in coming months.” (Supermarket News)

In Boston’s Surging Real Estate Market, New Condos Race to the Top “As Boston’s profile as an international city rises, so to are some of the tallest, most amenity-filled condominiums the city has ever seen. Glossy new residential towers are rising across the city, invading some corners of town long-neglected by upscale property developers. The flood of new buildings come as prices in Boston continue to soar. The median price of a condo reached $913,500 in the third quarter of 2016, a 43 percent rise from the same period last year, according to data from real estate marketing firm LINK.” (Forbes)

U.S. Households Will Soon Have as Much Debt as They Had in 2008 “It feels like 2008 again. At least, if you look at Americans’ wallets. The New York Federal Reserve announced Monday that in 2017 total household debt will reach its previous peak of $12.68 trillion, which it reached in the third quarter of 2008. It’s already close: Total household debt in the fourth quarter of 2016 was nearly as high, at $12.58 trillion. While the debt level is similar to 2008, the things Americans are in debt for have changed, as household incomes have increased in recent years, and housing and stock prices have improved.” (MarketWatch)

Seattle Mayor Drops Property-Tax Plan, Seeks Sales Tax to Fight Homelessness “Barely a month after announcing it, Seattle Mayor Ed Murray and entrepreneur Nick Hanauer are scrapping their plan for a $275 million homelessness property-tax levy. Rather than ask city voters to approve the levy in August, Murray now intends to work with King County Executive Dow Constantine on a 2018 ballot measure that would use a 0.1 percent regional sales-tax increase to combat homelessness, the mayor said Monday.” (The Seattle Times)

Amazon Takes a Page from Bricks-and-Mortar Bookstores. Here’s What It’s Like Inside“Amazon Books on Southport Avenue, the fifth physical store from the Seattle online giant, and its first in the Midwest, is a deeply, unsettlingly normal place, a soulless, antiseptic 6,000 square feet, a stone’s throw from a J. Crew and a SoulCycle. It has the personality of an airport bookstore and conveys all the charm of its stone floor. Shopping there is as frictionless as a one-click purchase. There are no quirks, no attempts at warmth.” (Chicago Tribune)

A Real Estate Developer for the Next Generation “By the time it was completed last year, and its wealthy owners began occupying their sprawling new homes, The Pacific, a luxury condominium in San Francisco, had already begun getting buzz in real estate circles. much of the buzz surrounding the project had to do with its developer, Trumark Urban, and the man behind one of the most active real estate firms in the country, Arden Hearing.” (Forbes)

Children’s Investment Fund Provides $290M Construction Loan for UES Development“Last Friday night, a joint venture of Ceruzzi Properties and Kuafu Properties secured a $290 million construction loan from The Children’s Investment Fund for a project on the Upper East Side, Commercial Observer has learned. HFF‘s Dave Nackoul, Christopher Peck and Scott Findlay represented the developers in the deal, a company spokeswoman said. Peck would only say it was a floating-rate loan.” (Commercial Observer)

MBA Says Commercial U.S. Markets Feeling Early Stages of Tug of War “According to the Mortgage Bankers Association’s latest fourth quarter 2016 Commercial-Multifamily DataBook report released this week: The U.S. economy appears to have shifted gears post-election, with expectations of policy shifts and renewed “animal spirits” pushing both the stock market and interest rates higher. ‘Interest rates jumped markedly during the fourth quarter, in an immediate response to the November election,’ said MBA Vice President of Commercial Real Estate Research Jamie Woodwell.” (World Property Journal)

Hines Buys Houston Logistics Park for $155M “Talk about a growth spurt, Hines recently tripled its footprint in the metropolitan Houston industrial market with the acquisition of the 2.2 million-square-foot Underwood Distribution Center in La Porte, Texas. The international real estate firm purchased the five-building park, which also features three development parcels, from BlackRock in a $155 million transaction. Underwood is quite a catch. For starters, the portfolio is 100 percent leased. Additionally, it’s relatively new, with the buildings having been developed between 2005 and 2008.” (Commercial Property Executive)